While many sectors of commercial real estate have come roaring back in the past year, office space has been one of the well-known laggards. But with the COVID-19 pandemic subsiding, an increasing number of companies have reopened their offices and are beginning to require employees to come back, at least for part of the week.
The question remains, what aspects of the pandemic-era work life will survive this shift back to the office? This past May, CBRE Americas research director Jessica Morin spoke to Scotsman Guide about how the office sector is beginning to make a comeback. She discussed some of the changes to expect in the office environment going forward, including a push toward hybrid work strategies.
What are the major trends you are currently seeing in the office-space sector?
One major trend is the return to the office. After a long period of stagnation, the return to the office is ramping up and office occupancy is gradually improving. Occupancies are at the highest level since the pandemic started at 43.4% of pre-pandemic levels nationally, and it’s above 60% in certain cities, including Austin.
Other trends include strong employment growth, which is supporting demand for office space. Leasing in the first quarter (of this year) was driven by technology companies, financial services, life sciences and professional services. We also see a flight to quality underway. As new construction is delivered to the market and new development moderates, it will be more challenging to find top-tier space — especially large blocks of space — in high-demand markets. The headwinds include uncertainty in the sector. Slower economic growth and the broader adoption of hybrid work may temper demand.
Our baseline view is that we expect to see a net reduction in office demand, but it’s not severe.
How is the U.S. office-leasing environment changing?
Tenants are coming off the sidelines and making lease commitments. Leasing volume in the first quarter was approximately 46 million square feet, which was less than in the previous two quarters but up by 26.3% year over year. Of those leases, about 75% were new, which is a vast improvement from when the share fell to 50% in late 2020.
Where in the country are you seeing the strongest recoveries?
Demand has been the strongest in lower-cost, high-growth Sun Belt markets such as the Austin, Dallas-Fort Worth and Charlotte areas. We are also seeing growth in the technology and life-sciences hubs such as San Jose, Boston and Los Angeles. Though it’s still negative, net absorption markedly improved quarter over quarter in places such as Manhattan, San Francisco and Seattle.
The pandemic has resulted in many new office trends. What aspects of this period do you expect to last long term?
Our baseline view is that we expect to see a net reduction in office demand, but it’s not severe. It’s about a 9% reduction. You will continue to see the adjustment of space designs that promote collaboration. This will include more space set aside for meeting areas. We expect that this shift to meeting spaces will prevent most companies from significantly reducing their office space in the near term. We do expect the work-from-home trend to continue and we are still seeing growth in the suburban office sector. The impact on the office will be offset over time by continued employment growth and a moderation in new office development. If job-growth expectations worsen, the reduction in demand could be more significant.
CBRE has highlighted the move toward hybrid work strategies. What are hybrid work strategies and how widespread are they in corporate America?
Hybrid does not mean the same thing for every company, and it shouldn’t be a one-size-fits-all approach, as organizations have varying operations and needs. We see that the desire among companies to foster a culture that supports hybrid working arrangements is strong. That means creating flexibility for employees and maintaining some level of predictability for companies.
The approaches vary from hybrid work strategies that give employees complete autonomy over when and where they work to companies requiring employees to come in on specific days or for certain activities. What is widespread is the desire by companies to have employees in the office on some level. We have found that 85% of respondents in CBRE’s Spring 2022 Office Occupier Sentiment Survey indicated that they wanted employees in the office at least half the time.
How do you expect hybrid work strategies to change the way we work?
I think we can expect more inclusive work patterns in the future as we shift away from the traditional five-day, 9-to-5, office-based workweek. Employers will create new working models, and provide high-quality spaces that accommodate more lifestyles and promote productivity and employee wellness. ●
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